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5-Year Term with 20 years Amortization?

What is meant by a 5-year term with 20 years amortization?


That phrase describes a loan with a long payout schedule (20 years), but a shorter maturity (five years). In this case, there will be a substantial balance remaining due at the maturity of the note. The lender wants the chance to review the loan (for interest rate, payment record, etc.) at the end of the shorter period.

Another descriptive term that's often applied to such notes is "balloon payment note." That term generally means that the final payment is twice as large (or more) than the regular payment on the note.

At the five-year maturity of such a note, it's typical to either refinance it with the same or another lender, or for the lender to modify the note to set another interest rate and payment amount for a second term (perhaps another five years). Another possibility is that the borrower simply pays off the loan.

Published on BankingQuestions.com 10/23/07